Consumers are now pulling out their old, little-used credit cards only to find out that their credit limit has been cut in half – or that their credit cards have been maxed out.
All of this can lead to a negative shift in consumers’ credit scores if the change isn’t caught in time.
When questioned, Matt Schulz, the chief credit analyst for LendingTree said this: “It’s all about managing risk for banks. Things are so volatile and things are changing so quickly that banks don’t necessarily know who is risky and who is not.”
This is a common reaction when unemployment spikes; and if caught in time, can be reversed. However, as the recession continues, and as unemployment rates do increase, banks are trying to protect themselves from liabilities.
So here’s what consumers can do to stay proactive and protect themselves from what could be considered as unwarranted credit limit changes:
- Pay attention to your credit utilization ratio. Ideally, you want to keep your credit utilization below 30% and anything below 10% is perfect.
- If you can afford it, try to make more than the minimum monthly payment.
- Make responsible purchases and make your monthly payments on time. –
Lowering credit limits during a recession isn’t an unprecedented act by banks. We saw the same thing happen during the financial crisis of 2008 where even the most creditworthy cardholders faced limit decreases. In April of this year, both Discover Financial Services and Synchrony (the lender for JC Penney, American Eagle Outfitters, and Gap) both started closely monitoring current client limits and started honing in on new consumer credit limits; tightening the reigns until there is some resemblance of normalcy with the economy.
According to Bloomberg, banks are hoping to come up on top after this financial crisis ends, by heading into the unknown with stronger balance sheets by rolling out payment deferral programs, and opportunities for consumers to keep their heads above water.
Good news is, some actions consumers can take when they get notified about a credit limit decrease are:
- Call the card issuer immediately. While tedious to do so, the call doesn’t take too long and most of the time; customer service representatives are willing to help. Banks don’t want to lose your business.
- Consider opening another credit card with a different issuer. Chances are, if you have good credit history with one issuer, you can find another that will find you creditworthy and give you a limit that you deserve.
- Pay off any outstanding balances. Even if it is before the due date.
The bad news is, none of the above mentioned is foolproof. Issuers can still deny your request to resume back to your old credit limit.
There are consequences to issuers lowering limits, and that comes down to the lack of funds that could be available to consumers as Covid lingers. And since banks can set whatever limit they want to, if your limit does get lowered and it’s below what your balance due is; consumers’ credit scores will be affected.
Which is sad. In a time of chaos and uncertainty, our credit limits are supposed to be our emergency funds. Looking at how much control banks have over what we do with what’s supposedly our money, puts not just non-preferred borrowers in even more of a pickle, but banks are now even putting creditworthy borrowers at risk by putting the consumers at an unprecedented disadvantage.
We can’t put the entirety of the blame on banks, however. With banks trying to mitigate their own losses, they are now limited to what they can lend out. And this is what we have seen in previous recessions. To mitigate their losses, and compensate for the drop in lending that they themselves have experienced, banks can only lend out what they have. In essence, in order to be able to lend out money; banks are trying to control how much they have already lent out to consumers. A little backward, isn’t it?
While banks are lowering credit limits, we have to remember that utilization has to change as well.
For example, if a consumer’s credit limit is lowered to $5,000 from $10,000 and this consumer continues to utilize $2,000 of that limit every month, this person has now gone from an adequate debt to income ratio of 20% to 40%. And as mentioned above, ideally every consumer should be below 30% when it comes to analyzing and calculating one’s DTI.
Here’s some more bad news. Banks don’t have to notify consumers if and when they’re going to change someone’s credit limit. Unfortunately, regulations that are passed like the CARD Act states that if there is a change to a consumer’s interest rate or fee structure, or if there are any other “significant changes”; banks have to give consumers a 45-day notice.
That being said, “significant changes” only goes as far as covering any changes in minimum monthly payments; and intentionally leaves out credit card limit changes. More specifically, according to the Federal Reserve Bank of Philadelphia, the Board of Governors of the Federal Reserve System (the people responsible for implementing the card act) defines a “significant change” in this manner: “An increase in minimum payment, the acquisition of a security interest, the changes to the APR, issuance fees, fixed finance charge/minimum interest charge, transaction charges, grace period, balance computation method, cash advance fee, late payment fee, over-the-limit fee, balance transfer fee, returned-payment fee, required credit insurance debt cancellation/suspension coverage, amount of available credit, and the reference for billing error rights.”
There is a morsel of good news, however. The Truth in Lending Act does require lenders to notify consumers if changing their credit limit will trigger an “over-the-limit” fee.
With all of this being said, it’s important to remember that change in credit card limits isn’t necessarily an indictment to consumers. Credit limits are susceptible to the volatility of the economy, and thus the ever-changing financial uncertainty this world is facing.
Credit limit changes are often applied to a large segment of a bank’s consumer base because of the shift in economic climate and bank lending capabilities. And even though these changes aren’t meant to be permanent per se, the change in our spending habits might have to be.
In the near future we’ll probably have to get used to this new normal for better or for worse (probably for the better).